Wednesday, August 10, 2011

Greg Mankiw thinks Obama's stimulus worked

Fiscal policy is going to be a drag going forward as the stimulus wears out.

The end of stimulus will be a drag on growth. So what Mankiw seems to be saying is that the Obama stimulus increased economic growth.

Note that Mankiw has statednumeroustimes that he is a "stimulus skeptic." In general, he has been coy on the subject. On one hand, he has never claimed outright (as have many prominent "neoclassical" economists) that stimulus is incapable of boosting growth, and he has extolled the virtue of tax cuts (though he has left it unclear whether he believes they work via demand-side effects). But he has also said that he doesn't think Obama's stimulus was very effective, and he linked uncritically to a paper that purported to show that the stimulus destroyed jobs overall.

Now, Mankiw seems to have revealed that, like John Taylor, he's a closet Keynesian...or, at least, that his views on the effects of government spending on growth are more nuanced than he usually admits one might be led to believe from the amount and variety of criticism he has leveled at the ARRA. And by saying that the stimulus will soon "wear out," he is also admitting that his concern that "a spending-based stimulus to address the current short-term crisis might lead to a long-term increase in the size of government" was overblown.

As Bob Lucas once said, "I guess everyone is a Keynesian in a foxhole." We're certainly in a foxhole right now.

Update: Note that Mankiw's statement is certainly compatible with the view that the Obama stimulus worked, but wasn't worth the price. So this post is less of a political "gotcha" than simply an observation that, deep down, a lot of stimulus skeptics implicitly believe that an Old Keynesian model has some truth to it.

Update 2: As a commenter points out, Greg Mankiw is indeed a "New Keynesian" - indeed, he could be considered the founder of the New Keynesian movement (which has been attacked pretty strongly by Neoclassical economists like Robert Barro). However, New Keynesian models are basically monetarist; though recessions are caused by demand shocks, there is no place for fiscal policy (at least, not until people have started trying to put fiscal policy back into New Keynesian models very recently). Mankiw has not been as hostile to the idea of fiscal stimulus as the Neoclassicals, but he has made it pretty clear that he doesn't think government spending does much to raise output.

Update 3: Commenter Ptuomov reminded me of this Mankiw policy paper from earlier this year. In the model Mankiw uses in the paper, fiscal policy is almost never useful, and can only be useful in a very limited set of circumstances (which Mankiw makes it clear he does not believe reflect our current reality). So IF Mankiw really believes in the model he uses in this paper, then musn't he believe that Obama's stimulus came at a time when those very specific circumstances held?

OK, I have decided to stop posting updates. I almost regret writing this post, actually. In my attempt to show that Mankiw was sympathetic to the Old Keynesian point of view, I unfortunately seem to have ended up causing some offense (the "hypocrite" thing), which was certainly not my intent. And then I was led to try to parse the totality of Dr. Mankiw's actual views on stimulus, which turned out to be quite difficult (they are indeed nuanced). So I think I'll wrap up, by saying:

1) There is still a question in my mind as to why Dr. Mankiw has spent so much time and effort publicly criticizing the stimulus, when his views on it are so nuanced. However,

2) It turns out that Dr. Mankiw's quote on Kudlow was perfectly consistent with the theoretical papers he has written, meaning that the quote did not really reveal anything new. Certainly, the quote revealed no hypocrisy.

31 comments:

I think coy should be mankiws middle name. He routinely posts misleading graphs that smack of politics more than any real economic analysis. Since he allows no comments on his blog, he can't be called out on any of it.

Now, as part of Romney's political team, he can be counted on less than ever to add anything meaningful to the conversation.

I suggest that you read the following paper which in my summarizes Greg Mankiw's position on macro policy very well: http://www.economics.harvard.edu/faculty/mankiw/files/Exploration%20of%20Optimal.pdf

God catch Noah. What struck me is when he said he's not WORRIED about Bernanke trying to inflate our way out of this. Not worried? He recommended inflating our way out of it. Now he's acting like it's something to worry about (because that's what the crazies on the right say). That's some pretty serious selling out - and at the cost of the country no less.

The first fundamental difference here between different people and different conversations is the following: What do you mean by fiscal stimulus "working?"

A competent economist should do the welfare comparison, basically utility gain from fiscal stimulus. A non-economist (such as a statistician) or an incompetent economist would look at things such as multipliers or bang per buck when deciding whether fiscal stimulus is a good policy. (Ok, having a bit of fun there with competent/incompetent...)

Most (all?) correctly solved New Keynesian models say that, even in the presence of zero nominal interest rate bound, if the central bank can commit to keeping interest rates low for a long enough period of time, monetary stimulus is more efficient than and dominates fiscal stimulus from welfare gain perspective.

Mankiw & Weinzierl's paper is great in that it is (a) a very simple and thus accessible model that (b) has all the New Keynesian assumptions and (c) is correctly solved and (d) is realistic enough to be used for practical policy advice.

I predict that if many self-proclaimed "New Keynesian" bloggers etc. would really read and understand that paper, they would stop shouting their current policy advice in ALL CAPS and spend a period of time reflecting and revising their views.

ptuomov identifies the problem correctly, though I think he's got the sign reversed on his "competence" variable ;-) The sane and the conservatives have different definitions of what they mean, by "fiscal stimulus 'working'", and the difference is incommensurable.

Old Keynesians said, the classical model of the macro-economy as "naturally" hewing to a homeostasis corresponding to a unique general equilibrium is wrong, full stop. Money and financial intermediation matter a lot to a continuous dynamic process, and they make Says Law, wrong, wrong, wrong.

New Keynesians, as I understand it, argue that the macro-economy does tend to a general equilibrium Solow-path "in the long run", if we help it along a bit, and good policy consists of helping the actual economy behave 'as if' the classical model were correct. As Brad DeLong might say, Says Law is wrong, but the task of policy is to make it right.

Mankiw's argument in Mankiw-Weinzierl seems to me to conform to this general and defining New Keynesian architecture: policy should aim to make the classical model correct, and under the classical model, fiscal policy 'does not work' to improve welfare (beyond classical cost-benefit considerations). If the economy is 'far' enough from classical equilibrium, then more radical policy steps than usual may be justified to bring it back toward classical equilibrium, but fiscal policy still sucks in classical terms, so there!

Mankiw-Weinzierl works well, as an analytical clarification of Mankiw's priors, so if our primary interest is the particulars of Mankiw's subjective view, it is somewhat enlightening. It tells us how Mankiw thinks an economy "works", in a moral sense. But, it doesn't give us any purchase at all on how the economy "works", in a functional, operational sense.

Noah's instinctual impulse, to shout "Gotcha!" when Mankiw expresses a conventional expectation with regard to the effect of the fading stimulus on aggregate activity reflects an admirable desire to see Popperian falsification in action. If the economy were anywhere near a classical/full-employment equilibrium where fiscal policy would have no aggregate effects on welfare, operational values of aggregate levels of activity would also not be behaving as Mankiw (and pretty much all other sane folk) expect, to the fading of stimulus, and the coming of austerity.

As ptuomov wryly notes, real economists do not build operational models, using modal instead of categorical reasoning; statisticians might. Without such operational models, though, Popperian falsification is a non-starter.

I see a theme developing between this post, and previous ones, including not just Taylor, but also the recent Lucas post. And, the Clive Cook moderated Krugman-Barro lovefest comes to mind as well.

Conservatives prefer to minimize or ignore operational circumstances in their policy recommendations. ("Zero lower bound? Bah, humbug!" "The money has to come from somewhere, even in a depression") They like to promote moral causality in their narratives ("business confidence!"), even to the point of losing all sense of quantity or proportion. And, they "test" their ideas subjectively, pridefully leading with a solipsistic skepticism and categorical models.

In terms of the intellectual history from Old Keynesian (thru the neoclassical synthesis I was taught), to the current New Classical/RBC/New Keynesian stalemate, I would propose a corollary to Minsky's financial instability hypothesis: the longer policy is successful in imitating a classical equilibrium, the more idiots will think that that's the way the economy actually operates.

I think you are selling yourself short if you are using Brad Delong's posts as evidence of anything about Greg Mankiw's thoughts. Based on his blog, I am starting to think that Prof. Delong has some anger issues that are dominating his posts. Perhaps he's simply very concerned about the world and where it's going; however, what I like about your blog is that it's more about working things out than displaying frustrations.

Although I am not a mind reader, I would say that Prof. Mankiw's views on economy are well summarized that one paper to which I linked. If you can create a temporary increase in government spending, it stimulates in a recession. It may not be optimal policy from welfare perspective, but it increases reported GDP. Furthermore, if the central bank doesn't have the credibility to commit to future interest rates, it may even be good policy from welfare perspective.

My impression is that Prof. Mankiw's primary concern about the 2009 fiscal stimulus was that there was a significant risk that the government spending that was supposed to be temporary would turn into permanent spending. In other words, how is our government going to commit to spending less in the future if they spend more now?

In other words, all of Greg Mankiw's statements on this stimulus topic are fully internally consistent and furthermore consistent with the academic papers he writes. That's a significant achievement for someone who has been as close to actual policy making as he has been.

"My impression is that Prof. Mankiw's primary concern about the 2009 fiscal stimulus was that there was a significant risk that the government spending that was supposed to be temporary would turn into permanent spending. In other words, how is our government going to commit to spending less in the future if they spend more now?"

Which also applied to the Bush tax cuts. I don't recall Mankiw raising that issue.

"That's a significant achievement for someone who has been as close to actual policy making as he has been."

Mankiw signed up in the Bush administration in 2003, when it was clear to honest observers that it was even deeper in econofraud than the Reagan administration (see Krugman's columns from 2000-2002 for details).

That, right there, makes Mankiw a liar and hack on any issue until proven innocent.

I've enjoyed many of your posts but your comments about Mankiw do not resonate with me as accurate. Your characterization of Mankiw's opinions do you strike me as fully correct. As to a closet Keynesian, Mankiw has always been out of the closet. In a recent interview with Tom Keane of Bloomberg he was very clear that he is an admirer of Keynes, but does not believe that classic Keyensian solutions will work. Nonetheless, you may be right and I may be wrong.

In a country where 1 percent of the population controls over 40 percent of the wealth what is the point of looking at net social welfare?

Did it ever occur to anyone that doubling the wealth of the top 1% and cutting the wealth of bottom 90% in half would represent a MASSIVE increase in net social welfare? (Please ignore the food riots on your way to the day spa...)

If you are really concerned about public policy and not posturing - you should also call out Delong/Krugman for not allowing data in comments that contradict their posts. John Quiggin (Far left) and Mankiw (Centre Right) are far better than these 2 in terms of online intellectual honesty.

Don't try to be Delong's baby - establish your own standards for intellectual discovery - and try to avoid these gotcha political posturing posts. You do your intelligence a disservice.

You are off course correct that the cross-sectional distribution is important to aggregate utility if people have similar risk averse utility functions. However, I think that welfare comparisons are useful even if they are not realistic. At least, Mankiw is trying to do the right thing.

Between the WW2 and 2000, the business cycle related to cross-sectional distribution in the following way:- One year income inequality increases in recessions- Consumption inequality does not increase in recessions- If consumption data are used to predict income, the permanent income inequality doesn't increase in recessions- Utility losses from recessions are small

Historically, it has not been the case that episodes of higher unemployment have forced people to significantly adjust their consumption paths. Recessions in general don't seem to be an important issue from utilitarian social welfare perspective.

Some caveats:

First, government policy in the form of automatic stabilizers and Taylor rule Fed policy may be the cause of the fact that recessions are not important to utility. In a sense, the conclusion may be that problem is being managed well instead of there not having been a problem int he first place.

Second, this time it could be different, of course. Unemployment duration is much longer in this recession and people's perceptions about their housing wealth have declined dramatically. So when we have household-level data on consumption during the great recession, it may indeed show big revisions of consumption paths and big utility losses.

many of mankiws comments are in the NY times; as I, an avg times reader, read them, he said, yes, stimulus works, but if leaves a deficit, and I think that lowering interest rates is better...so , contrary to your position, I think mankiw has been reasoanble on this one (as opposed, say to teh hocky stick graph...)

As a short run comparison of policies I can see how a straight comparison of social welfare is *informative* but I maintain it is far from determinant with respect to what policy is better.

I would argue we have decent evidence that the utility losses are significantly disparate across socioeconomic strata. This is potentially a source of significant social problems that can be avoided by maintaining higher levels of employment at the risk of lower net (but more equally distributed) gains in utility.

What Mankiw says is that if the government spends $1 Trillion, then we'll see about $800 Billion of benefit in the short run as public spending displaces some private spending. Then we all have repay about $1.1 Trillion through higher taxes which reduces consumption. In summary, we get pay $1.10 for an $0.80 gain. Does this sound like a good investment to you? Clearly it isn't.